#LCAW2022: Do passive ESG funds drive positive change?

by | Jun 29, 2022

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Celebrating London Climate Action Week, this article features as part of IFA Magazine’s editorial campaign throughout this week, which aims to highlight key issues, news and views in the field of climate action.

Written by Scott Waistell

Is a passive fund management approach accordant with environmental, social and governance (ESG) investing? The growth of both these trends has led to the question as to whether they are happy bedfellows.

The growth in ESG indices supporting passive strategies places it as a credible alternative to an active approach. Since 2018 over $54 billion has been invested in passive ESG funds, which compares to $23 billion in active funds.

There is a popular opinion that only through active fund management can effective ESG change be achieved. Through positive inclusion, companies with high ESG credentials built into sustainable portfolios are helping investors to sleep better at night.

Although active management facilitates positive inclusion and quick responses to controversy, such as with Boohoo in 2020, it does raise a slightly different question. Does stock picking ‘sustainable’ funds drive broader and deeper change?

Setting the passive vs active cost argument to one side, by looking at an index linked passive strategy, it is clear that a greater number of companies will be engaged by fund managers, and specific concerns can be presented, such as board composition or oversight of risk, potentially driving wider and arguably greater change.

Funds within ebi’s ‘Earth’ portfolio follows a different ESG methodology which broadly falls into three approaches; exclusion policies which removes companies in ‘dirty’ sectors such as those involved in vice industries (tobacco, gambling) or controversial weapons, the inclusion of funds which employ carbon reduction strategies, and finally incorporating fund managers which have a strong engagement or stewardship policy.

All within the context of index or rules based fund providers. Stewardship, often overlooked, is “the responsible allocation, management and oversight of capital to create long term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”2
. This includes executive compensation, shareholder rights and importantly proxy voting. Vanguard reported in its 2021 Investment Stewardship Annual Report that it engaged with 1,074 companies representing $3.5T equity assets under management.

At a high level, this includes:
✓ 177,307 proposals voted on at 12,937 companies
✓ 29 markets engaged
✓ 1,447 engagements with directors and other stakeholders

In BlackRock’s Investment Stewardship Annual Report 2021, the investment manager undertook 3,642 engagements with 2,354 companies.  The figures above demonstrate the breadth and depth of engagement, and how sustainability is being prioritized in boardrooms across the world.

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